Rising retirement age means that smart saving is more important than ever

WHO WANTS to work forever?

The government is raising the retirement age - what can we expect to happen as a result?

For most people the answer will be “not me, thanks”, but if the Government has its way, they may have little choice.

Both Labour and the Conservatives have been gradually pushing back the state retirement age, so that today’s workers may have to carry on into their late 60s and beyond before they can draw their state pension.

Already, more than one million men and women work past age 65, and their numbers are rising all the time.

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The only way to retire at the time of your choosing is to save enough in a company or personal pension

Neil Adams

However, two new pieces of research published this week suggest there are limits to Britain’s growing “work until you drop” culture.

Life expectancy may be rising, but too many of us will not be fit enough to work for as long as the Government would like.

So what fate awaits them?

Work, work, work

Almost two in five of today’s retirees were forced to stop working before they reached the state pension age, either because of ill-health, being physically unable to do their job, or redundancy, according to insurer Aegon UK.

Its Golden Age of Retirement report showed that only half the population stopped working at the age they had expected to.

Aegon’s findings are echoed by separate research from Just Retirement, which also showed that many women are forced to stop work early to nurse a sick or elderly relative.

Just Retirement communications director Stephen Lowe says: “People are being urged to think about working for longer, but our research shows the decision is not always in their hands.”

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By 2020, retirement age will be 66 for both men and women

To make matters worse, the Government is pressing ahead with plans to hike the state pension age even higher.

By October 2020, it will be synchronised at 66 for both men and women. It will then rise again to 67 between 2026 and 2028, and to 68 between 2044 and 2046.

Neil Adams, head of pension planning at advisers Drewberry Wealth, says that under the Pensions Act, these dates must be reviewed every five years based on the latest life expectancy data: “With the first such review due in May, we could well see the state pension age rising still further.”

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Protect yourself

Thanks to pension freedom rules introduced in April 2015, you can now access your entire pension from age 55.

This has given savers far more control over their pension pots, but does not solve the basic problem that most will simply not have enough money to retire at that point.

Adams says: “The only way to retire at the time of your choosing is to save enough in a company or personal pension, or other investments such as tax-free Isas and property.”

Millions of lower paid workers are now saving into workplace pensions for the first time under auto-enrolment, but Adams warns: “Most will not be saving enough to provide the lifestyle they would like in retirement.”

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Falling interest and annuity rates are also making it harder for ordinary people to save enough, as they will struggle to generate the income they need from their nest eggs.

The task will be even harder if you fall sick and cannot continue working. Just one in 10 Britons has a type of insurance known as income protection, which pays a replacement income lasting until retirement in such cases.

For the rest, early illness can be a financial disaster, as statutory sick pay from your employer and state benefi ts, such as the employment and support allowance (ESA) are barely enough to live on.

Roughly 40% of people are forced out of work before retirement age by redundancy or ill health

Early payout

The Government is working to address this by launching the Cridland Review, which examines whether people could claim the state pension early in case of ill health.

Aegon director of pensions Steven Cameron says with the pension age set to rise and rise, ministers must find a permanent solution for those who cannot work into their late 60s: “If the Cridland Review comes to one conclusion, it should be to allow people to take their state pension from an earlier age, such as 60, albeit in return for receiving a smaller payout.”

The payout would be lower to refl ect the fact that they will be claiming the state pension for longer.

This could be further reduced because workers need 35 years of National Insurance contributions to claim the full state pension, and those who have to retire early may not manage that.

Early retirement will not be a soft option, unless you have plenty of savings elsewhere.

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Take advantage of company pension schemes and other saving opportunities or work may last a lifetime

Let's get physical

Those who have already retired may be counting their blessings as they watch the younger generation either work to ever greater ages or fall by the wayside.

Andrew Tully, pensions technical director at Retirement Advantage, says today’s workers need to start saving early and put aside as much as they can afford: “Take advantage of any company pension scheme, as your contributions will be topped up both by your employer and the Government.

“Alternatively, claim tax relief on personal pension contributions or save into an Isa.”

Shifting to part-time work as you get older may be another option to keep the income flowing and to top up your pension, Tully adds.

Otherwise the only option is to work forever, and few of us will either be willing or physically able to do that.